Economics with a Broader View

232 (30 September 2015)

Welcome to week 232! The articles below caught my attention this week. Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********). The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by an Internet title search.

********This lengthy article appeared in the September 15 paper edition of Fortune. It chronicles the story of activist hedge-fund owner William Ackman to quest to “bring the $5-billion-in-revenue nutrition giant” on the basis of its being a pyramid scheme, a quest that was first reported in December 2012 and continues. Although some multi-level marketing (MLM) companies are legal, some MLMs are pyramid schemes, which are illegal. There appears to be no legal “bright line” to distinguish between them, although the degree to which distributors are paid for selling product versus recruiting distributors is important. Companies that pay their distributors largely on the basis of product sale are not likely to be found to be pyramid schemes. The legal status of MLMs stems in large part from decisions made by the Federal Trade Commission in relation to Amway in 1979. The legality of Amway has led other MLMs to emulate its business model. To date, Ackman has spent hundreds of millions of dollars pursuing his charges and, although there have been substantial price declines in the shares of Herbalife, they have not reached the point where Ackman has been able to realise a profit on his crusade to bring down the company.

********The article introduced a new term for me—Astroturfing. It is used by political consultants to describe instances where “a client’s agenda is made to look like a grass-roots movement.” It seems like there is a lot of Astroturfing afoot. Throughout the article, it is clear that Ackman’s actions have resulted in improvements in the way Herbalife does business. At its end, though, its author wonders “whether hedge fund managers with outsize egos, reputations on the line, and billion-dollar stakes make the best regulators. And whether, on the basis of their private, closed-door deliberations, they should be sentencing public companies to death.” All in all, a provocative article that provides a new perspective on regulation and its multiple forms, not all of which are governmentally based.

——–[A review of Superforecasting: The Art and Science of Prediction, by Philip E. Tetlock, who is the Annenberg University Professor at the University of Pennsylvania. He holds appointments in psychology, political science, and the Wharton School of Business.] In the wake of America’s “disastrous misadventure in Iraq” Tetlock ran a contest posing “hundreds of geopolitical questions . . . to thousands of volunteer participants. A small number of forecasters began to pull clear of the pack” and were subsequently dubbed superforecasters. “Their performance was consistently impressive. With nothing more than an internet connection and their own brains, they consistently beat everything from financial markets to trained intelligence analysts with access to top-secret information.” In studying these people, Tetlock and is collaborators found that “More important than sheer intelligence was mental attitude.” In a world of hedgehogs and foxes, “Superforecasters are drawn exclusively from the ranks of the foxes.”

********The reference to hedgehogs and foxes stems from the work of Isaiah Berlin, who in his book The Hedgehog and the Fox, writes: “The fox knows many things, but the hedgehog knows one big thing.” Berlin’s book is now available in a second edition with new material, which you can learn more about at: http://www.amazon.com/Hedgehog-Fox-Tolstoys-History-Second/dp/069115600X/. Tetlock holds that the possession of a “growth mindset” is especially important, i.e., “a mix of determination, self-reflection and willingness to learn from one’s mistakes. The best forecasters were less interested in whether they were right or wrong than in why they were right or wrong.” Evidently, this interest is something that can be cultivated. You can learn just a bit more about cultivating superforecasters by reading the Abstract at: http://pps.sagepub.com/content/10/3/267.abstract.

——–“In a 2007 purchase of medicines from Merck KGaA, drugmaker Mylan picked up a decades-old product, the EpiPen auto injector for food-allergy and bee-sting emergencies. Management first thought to divest the aging device, which logged about $200 million in revenue. Then Heather Bresch, now Mylan’s chief executive officer, hit on the idea of using old-fashioned marketing in part to boost sales among concerned parents of children with allergies.” Today, EpiPen generates $1 billion of revenue per year and provides 40% of Mylan’s operating profit. “How Mylan pulled that off is a textbook case in savvy branding combined with a massive public awareness campaign on the dangers of child allergies. Along the way, EpiPen’s wholesale price rose roughly 400 percent, from about $57 each when Mylan acquired the product. . . . The price increases are among the biggest of any top-selling brand drug . . . After insurance company discounts, a package of two EpiPens costs about $415,” according to DRX, “a unit of Connecture that tracks drug pricing.”

********The recent media attention given to the pricing decisions of Turing Pharmaceuticals for Daraprim probably ensures that we will be reading more stories about drug prices in the weeks to come, especially in light of our place in the election cycle. Federal legislation regarding to the stocking of epinephrine devices like EpiPen seem to have contributed to the success of the product. CEO Bresch is the daughter of Senator Joe Manchin of West Virginia. A four-minute video accompanies the article.

——–“A wave of bankruptcies and closures is sweeping across the oil patchy, with dozens of hydraulic-fracturing companies at risk . . . Most of the companies that help oil-and-gas explorers drill and frack wells are small, privately owned and just a few years old. They are part of a flood of new entrants in the energy business—one that is drying up as oil price” fall below $50 a barrel. According to energy analysts at Wells Fargo & Co., “as much as half of the available fracking capacity in the U.S. is sitting idle.” Although some firms are closing down and selling their assets, others are not. In that latter group is Colin Raymond, who formed Compass Well Services five years ago. He notes, “We’ll run in the future when pricing gets better . . . We’re not going to lose money and tear up our equipment.” For those selling out, their “fracking equipment is available for purchase at steep discounts.”

********In a sense, with the decrease in the price of oil, these small producers are getting hit twice. Once due to the reduction in sales and once due to a decrease in the monetary value of the physical assets used in production. All this is reminiscent of early materials that appear in Irving Fisher’s classic book The Theory of Interest (1930). Relevant material can be found at: http://www.econlib.org/library/YPDBooks/Fisher/fshToI1.html.

——–“With new minimum wage laws taking effect in various parts of the country, some restaurants have instituted no-tipping polices.” In the U.S. “it’s hard to imagine walking out of a restaurant—or hair salon, or nearly any type of service business at all—without leaving a tip. But that makes us different from many other places.” In a paper appearing in the Journal of Consumer Research, researchers found that the people in the U.S. tended to tip more professions than others, whereas New Zealand and Japan tended to tip the fewest jobs. Researchers found that “comfort with power disparities and hierarchies was connected to a tendency to tip.”

********The article concludes, “For anyone interested in the connections between culture and tipping, an interesting test will be how customers and workers react if more restaurants in the highly pro-tipping US choose to ban the practice.”

——–An increasing number of homes in the U.S. are being sold by so-called “pocket listings.” Such properties “aren’t advertised to the public, but pitched mostly by word-of-mouth among tight-knit networks of agents and their clients.” Such listings “have been popular among celebrities and the wealthy. But they increasingly are used by a broader segment as the housing market heats up and inventory remains tight.” These listings have their critics, as they may not lead to the maximum price for sellers and there is a risk of discrimination, but proponents speak to their ease and lack of disruption. “Agents who use pocket listings say they can generate an air of exclusivity. One pitch: Pocket listings reduce the risk of a property becoming stigmatized if it is advertised publicly and sits on the market for too long, which can depress its value.”

********While we are on the topic of homes and mortgages, the movie “99 Homes” is about to be released. You can read about it at: [SR](http://www.wsj.com/articles/thriller-opens-a-window-on-the-housing-bust-1443378933). The film, by director Ramin Bahrani, “is Hollywood’s first major treatment of the housing collapse that accompanied the 2008 financial crisis, looking at the impact on everyday people.” Bahrani “wanted a movie that would capture the reality of lives ruined when the financial system goes haywire—and yet still sell tickets for a mass audience.” Reviewer Joe Morgenstern of The Wall Street Journal writes about the movie at: http://www.wsj.com/articles/99-homes-review-eviction-as-art-1443123410. Morgenstern comments: “Here’s a surprise. ’99 Homes,’ a relatively small, tough-minded drama about pitiless people doing unprincipled things, proves to be one of the most interesting, elegantly crafter and—paradoxically, given the dark subject matter—elating films to come along in recent memory.”

——–“Aging in place” is an issue that is growing in importance as an estimated 10,000 baby boomers turn 65 each day. In 2013 “There were 26.8 million households headed by someone 65 and older . . . , up 24% from 10 years earlier, according to the U.S. Census. Households headed by a person 75 and older grew 13% to 12.2 million.” According to Lenard Kaye, who directs the University of Maine Center on Aging, “Ninety-nine percent of older adults say they want to stay right where they are until they’ve taken the last breath, but that doesn’t mean they are continuing to remain safe and remain well.” The challenges of aging in place are particularly acute in Maine, “where the median age was 43.9 years in 2013, compared with 37.6 for the nation.”

********The article goes on to point out that “the number of people 65 and over living in nursing homes fell nearly 20% in the 2010 Census from 10 years earlier, in part as states limited costly institutional stays.” Another contributing factor is the cost of assisted living: “the national median monthly rent is north of $3,500, according to the Assisted Living Federation of America and Genworth Financial Inc.” You can learn more about ALFA at: http://www.alfa.org/alfa/default.asp.

——–“Gazing out of a turboprop high above his company’s main asset—34,000 acres in the Mojave Deseret with billions of gallons of fresh water locked deep below the sagebrush-dotted land—Scott Slater paints a lush picture that has enticed a hardy band of investors for a quarter-century.” To date Slater’s company, Cadiz Inc. hasn’t “earned a dime from water. And he freely concedes it will take at least another $200 million to dig dozens of wells, filter the water and then move it 43 miles across the desert through a new pipeline before thirsty Southern Californians can drink a crop.” Although profits have been hard to come by up to this point, investors remain confident about the prospects of water. Notes Matthew J. Diserio of New York-based Water Asset Management, “Water is the scarce resource that will defined the 21st century, much like plentiful oil defined the last century.”

********As the article points out, even in the context of drought, bringing water to market has been slow and contentious: “Obstacles abound in the forms of skeptical regulators, wary customers and implacably opposed environmental groups.” Underlying some of these obstacles is the view that “Water is a public trust, and it shouldn’t be privatized.”

——–The classification system used by doctors, hospitals, and insurers is changing on October 1st. After being postponed three times since 2011, “the number of diagnostic codes doctors must use to get paid is expanding from 14,000 to 70,000 in the latest version of the International Classification of Diseases, or ICED-10. A separate set of ICD-10 procedure codes for hospitals is also expanding, from 4,000 to 72,000.” Billions of dollars have been spent by doctors and hospitals preparing for the new system.

********In addition to the written article, there is a four-minute video and an opportunity to explore “A Code For What Ails You.” I searched on a number of items, one of which was ‘mushrooms’. There are 12 codes associated with that item. As I thought more about this, the notion of a Rube Goldberg machine came to mind. I’m not sure this is entirely appropriate to the present situation, but I decided to learn more about the idea. It turns out that there are multiple variants of this notion internationally, and competitions and artwork are built upon it. You can learn more at: https://en.wikipedia.org/wiki/Rube_Goldberg_machine.

——–The ladies “who clean public toilets here . . . have been a fixture of Parisian neighborhoods . . . since the days when many buildings lacked indoor plumbing. . . . But as the numbers of ‘chalets de nécessité . . . have dwindled, so, too, has the presence of the ladies” who maintained them. The so-called “dames pipi” now number barely a dozen, “mostly older women who are first-generation immigrants . . . And unless they win a lawsuit to give them back their jobs, they will be a casualty of the city’s new effort to turn the remaining public bathrooms into moneymaking ventures.”

——–“Royal Dutch Shell PLC is quitting its $7 billion Arctic campaign after drilling just one well with disappointing results, becoming the latest big oil company to abandon the riches under the northern seas in the face of stubbornly low crude prices. . . . the company changed its mind after the well it drilled in the Chukchi Sea this summer—an area Shell had identified as particularly promising—showed only traces of oil and gas.” Shell obtained its licenses “explore the Chukchi Sea in 2008 and pushed ahead with the project when oil prices were historically high—more than $100 a barrel.” But the “drilling area called Burger-J . . . became one of the industry’s most expensive dry holes.”

——–“We hear a lot of talk promoting leadership in the workplace. But few people aspire to be followers. Most offices are populated with too many leaders and too few followers as a result. Now, some employers are training people in ‘followership.’ That doesn’t mean being a doormat or a docile sheep, but taking responsibility for shared goals, being a self-starter and telling leaders the awkward truth when they mess up.”

********As the article notes, and the associated three-minute video emphasizes, there are cultural reasons why “The follower role is hard for people to embrace . . . Good leaders are seen as the heroes of the American workplace. Employees imbued with an ‘up-or-out’ model of career management often assume there’s something wrong with them if they don’t aspire to leadership.” Although followership now seems to be getting its moment in the publishing sun, I wonder if the same will be true for two other roles commonly played by people in small groups and teams? I am referring to the roles of bystander and opposer. David Kantor is largely responsible for the four-role model: mover (leader), follower, bystander, and opposer. You can learn more about his work at: http://www.strategy-business.com/article/00154?gko=d4421. As I think more about this, maybe the book Quiet: The Power of Introverts in a World That Can’t Stop Talking (http://www.amazon.com/Quiet-Power-Introverts-World-Talking/dp/0307352153/) connects with the bystander role.

——–Recent work in behavioral economics is increasingly being used to improve government functioning. In 2010 the British government established a “nudge unit” and “found it could increase collections from delinquent taxpayers by telling them nine in 10 neighbors had paid up.” Although a similar technique did not work in the U.S., “President Obama issued an executive order encouraging agencies to conduct their own experiments.” The leader of the team undertaking the experiments, Oxford-educated scientist Maya Shankar, notes: “The goal is help people who want to take a given step but may fact some barriers.” In one experiment it was found that companies that signed statements attesting to the veracity of claims rebated more money to the government than companies that signed statements at the end. It seems that “promising to be truthful at the outset actually caused them to answer more truthfully.”